1. Field
This disclosure relates generally to financial reporting and, more specifically, to a specialized computing system and computer-implemented method for confirmation and certification of information reported by a hedge fund to its investors.
2. Background
Recent events in the hedge fund market have highlighted a substantial shortcoming in the manner in which investors allocate capital to hedge funds.
Specifically, investors often allocate capital without a great deal of transparency into the manner in which a fund's net asset value (“NAV”) is computed or the characteristics of which the assets are held. Recent economic instability, increased incidents of fraud, historic levels of investment losses and investor withdrawals, suspension of redemptions by some of the industry's largest players, and the demise of multiple hedge fund entities have all contributed to the call for greater transparency.
Hedge funds generally control the amount and type of information they share with investors. They must balance the amount and type of information disclosed to investors against their justifiable desire to protect proprietary information regarding the funds' investment strategy. In the current state, investors may receive investor balance statements and very little else, and this information may be inadequate to support the basis of informed investment decisions. Additionally, in some cases there is no independent party involved in the computation of the fund's NAV. In other cases, funds rely on an external administrator to produce the NAV. The result is a gap between the information investors need to make informed decisions and the information available.
While some measures have been taken to alleviate this gap, it is believed that each is in some way deficient. Some hedge funds have turned to external administrators and outsourced their reporting functions. However, there are no licensing requirements for external administrators in the United States, there are no set processes for their reporting methods and, most importantly, the external administrators themselves may rely in some part on the fund for information used in calculating the NAV. In other words, notwithstanding the role of the administrator, investors still lack an understanding of how the NAV was calculated and the source of the data relied upon in the calculations performed.
Annual external auditing functions are generally effective in determining the accuracy of transactions, but fail to contemplate the complete verification of fund data. Furthermore, the details that such audits may reveal are often untimely, since investors may not have a chance to see the details for up to a year or more after the information is generated. Additionally, audits opine on financial statements as a whole rather than individual components.
“Managed account” solutions may offer the investor full transparency into the account, but they may be problematic from the hedge fund manager's point of view because such transparency exposes the manager's investment strategy. Moreover, implementing managed account platforms can be costly and difficult to maintain.
“Agreed upon Procedures” are certain reporting procedures performed under professional accounting attestation standards, and are typically conducted by an external certified public accountant. However, Agreed upon Procedures can be costly and difficult to execute, and can be disruptive to the back office of the hedge fund.
A “SAS 70” is an examination conducted by a Certified Public Accountant firm. SAS 70s are often untimely because the reports may not be available until months after the initial testing.
Thus, there is a need to provide reliable information to investors and prospective investors from hedge funds via engagement of a third-party, which assumes responsibility for confirmation and reporting of hedge fund information.